Thursday, February 9, 2012

>STRATEGY: Whizdom - A DCF-based desicion-support tool

To read the full report: STRATEGY

>BLUE STAR LIMITED: Moving from HVAC (Heating, Ventilation and air-conditioning) to MEP (Mechanical, electrical and plumbing) orders:

We recommend “BLUESTAR” a BUY. Blue star is one of India’s largest central air-conditioning company with an annual turnover of INR2,900 crores. It has a market share of 7.5% in room air-conditioning market and is aiming to reach 15% in coming years. The company commands 30% share in packaged air-conditioning market and 25% in cold storage segment.


 Moving from HVAC (Heating, Ventilation and air-conditioning) to MEP (Mechanical, electrical and plumbing) orders: The company is focusing on MEP orders rather than HVAC, which increases the order book size by almost two and a half times. Almost, 75% of the order book comprises of large infrastructure projects (all sectors) and clients prefer to choose MEP orders as a matter of its simplicity. In simple terms, in case of large projects customers prefer MEP orders and HVAC orders for small projects.

 Consistent growth in Cooling Product Segment: The cooling product segment has been growing at a CAGR of 17% for last 5 years. The Company’s confidence in their strategy of channel expansion, continuous focus on high growth markets and products and their leadership position in refrigeration product business would help the company keep growing in coming years.

■ Company’s aggressive focus on room AC segment: The company which entered the room AC segment last year through retail route has already captured 7% of market share and is eying 9% by FY12. The company primarily focused on commercial and residential sector having equal business mix. But now, the residential sector would now account for 60% of the mix. It has plans to reach INR1,000 crores by 2014 in room air conditioner segment in terms of revenue.

 Company’s inviolable initiative to take measures to improve profitability: The company has taken various measures like a)setting up of separate hedging desk for copper and other commodities to reduce the risk of loss b) including price escalation clauses while booking new projects, as 70% of the orders are of fixed price in nature c) managing the capital employed in business through expediting debtor collection, commercially closing jobs and contemporizing delivery of materials, allocation of resources strictly base on requirements and payment trends.

To read the full report: BLUE STAR LIMITED

>ANDHRA BANK: Higher provisions on investment depreciation and NPV losses on restructured loan book dent bottom-line

Core & operating income in-line with our estimates; higher provisioning impacts bottomline

We reiterate our positive stance on the stock; improvement in GNPA and provision coverage levels provides comfort. Lesser than estimated bottom-line was mainly due to NPV losses on a telecom restructured loan book

 In Q3 FY12, Andhra Bank’s net interest income (NII) grew 17% YoY to ` 9.8bn — in line with our estimates. Margin remained stable at 3.81% in Q3 FY12 on sequential basis. Net profit de-grew 8.4% YoY to ` 3bn as against our estimates of ` 3.7bn and consensus estimate of ` 3.1bn.

 The deviation at net profit level was primarily on account of higher provisioning on restructured loan book NPV losses and Investment depreciation (` 190mn as against ` 1mn in Q3 FY11).

 There was 5.2% decline in gross NPAs on sequential basis; a key positive surprise in the result. Further, lower NPL provisioning (` 395mn as against ` 1.5bn in Q3 FY11) resulted in decline in credit cost to 22bps in Q3 FY12 as against 130bps in Q2 FY12 and 104bps in Q3 FY11). PCR increased to 66.4% as against 61.7% in Q2 FY12.

 The quarterly result was broadly in line on core income level, with a positive surprise on GNPL front — sequential decline in GNPL and stable margins improved overall performance. The asset quality (particularly on restructuring front) will be a key parameter to watch out for going ahead. We reduce our earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and maintain our Buy rating.

► Better business growth: In Q3 FY12, Andhra Bank’s total business grew 20.4% YoY to ` 1.8tn. Deposits and advances grew 20.2% and 20.7% to ` 987bn and `792bn respectively. Credit-deposit ratio increased to 80.2% from 78.9% in Q2 FY12 and 79.9% in Q3 FY11. On the deposits side, CASA share declined to 26.6% from 28.7% in Q3 FY11; however, rose from 26.1% in Q2 FY12. The loan book grew primarily due to 20.6% YoY growth in SME and 23.8% YoY in corporate sectors.

We expect business to grow 17.4% CAGR in FY11-13 on the back of credit book and deposit growth of 17.1% and 17.7% CAGR respectively in FY11-13. Stable margins: In Q3 FY12, Andhra Bank remained stable at 3.81% on sequential basis. Rise in yield on advances (31 bps) and yield on investment (7 bps) on QoQ basis as against only 13 bps QoQ rise in cost of deposits curtailed decline in margins. Going forward, we believe margins will decline on the back of re-pricing of deposits at higher rates. We expect Andhra Bank’s margins to rose by 5bps and fell by 20bps to 3.4% and 3.2% (on yearly average basis) in FY12 and FY13 respectively.

► Higher other income & contained operating expenses aided operating income: The banks reported traction in other income with 18.4% YoY and 32% QoQ jump to ` 2.4bn. The growth was led primarily by 97% YoY jump in forex income to ` 308mn and 65% YoY growth in treasury income to ` 163mn. However, fee income was flat at ` 695mn.

On operating expenses front, the bank was able to manage it efficiently, leading to a marginal 9.6% YoY growth to Rs 4.5bn. Its cost-income ratio came down to 37% from 39.7% in Q3 FY11 and 39.2% in Q2 FY12. Hence, it reported 22.5% jump in operating jump to ` 7.7bn.

► Higher provisioning affects bottom-line: In Q3 FY12, the bank’s NPL provisioning declined by 74% to ` 395mn compared to ` 1.5bn in Q3 FY11 and ` 2.2bn in Q2 FY12. In Q3 FY12, bank’s credit cost declined to 22 bps as against 104bps in Q3 FY11 and 130bps in Q2 FY12. Higher than expected provisioning of ` 2.5bn for standard assets as against Rs 315mn in Q3 FY11 and ` 190mn as against ` 1mn in Q3 FY11 on account of investment depreciation losses led to deviation on bottomline level.

 Asset quality improved on sequential basis; uncertainty remains in future: During the quarter, the bank’s gross NPA declined 5.2% QoQ to ` 18.8bn. Gross NPA ratio sequentially decline by 29bps YoY to 2.38% while net NPA ratio fell by 27 basis points to 1.21%. Provision coverage ratio rose to 66.7% from 61.7% in Q2 FY12 resulting in decline in net NPA ratio.

As on end-Q3 FY12, the bank’s outstanding balance in restructured loans was at ` 36.8bn; of which, majority came from major industries (telecom, textile and iron & steel) and MSME sector. On sequential basis, gross slippage ratio came down to 2.11% from 6.46% in Q2 FY12. Overall, the bank’s asset quality improved on sequential basis. In FY12, we expect bank’s gross slippage ratio to increase to 2.6%. We expect credit cost to slightly decrease to 0.68% in FY12 from 0.73% in FY11.

► View & valuation
The quarterly result was broadly in line on core income level, with a positive surprise on GNPL front. Sequential decline in GNPL and stable margins improved overall performance. The asset quality (particularly on restructuring front) will be a key parameter to watch out for going ahead. We reduce our earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and maintain our Buy rating.

To read the full report: ANDHRA BANK

>BHARTI AIRTEL: Flat minutes of usage in India disappoints street

Bharti Airtel’s Q3FY12 results were below our estimates on operational parameters. While revenue was up 7% QoQ at Rs184.8bn, EBITDA at Rs59.3bn was 3.5% below our estimates. Minutes of Usage (MoU) was flat qoq to 219bn min, lower than the street and our estimates. Operating margin was lower at 32% due to contraction in margin in enterprise and telemedia segments and higher contribution from Africa business (24% of cons. EBITDA) which generated 26.8% operating margin. Africa business showed steady performance with 13.9% growth (5% QoQ growth on local currency basis) in revenue and 41bps margin expansion.

 Results below street expectation: Q3 result came below expectation on two counts - 1) flat minutes of usage qoq and 2) Enterprise and Telemedia segment margin contraction. Apart from these reasons, the revenue mix in favour of Africa business which generated 26.8% operating margin pulled down the overall EBITDA margin to 32.2% during Q3.

 Africa business registes 13.9% QoQ revenue growth: The Africa business showed steady performance during Q3. Revenue growth of 13.9% QoQ to Rs53.6bn (5% on like-to-like currency basis) was driven by 3% MoU growth and exchange rate gain. Operating margin expanded by 41bp to 26.8%. Some one-off events hampered growth during Q3. Management indicated the trend was positive and expected growth momentum to pick up and revenue market share gain to accelerate across countries.

 Management commentary on margin pressure during Q3: 1) Mobile segment – one time provisions in Bangladesh impacted the margin despite RPM increase. 2) Telemedia segment – major reasons for margin decline was migration to the billing system. The loss of customers due to curbs on telemarketers also impacted growth and profitability 3) Enterprise segment – the fire at Mumbai station impacted profitability to an extent that required the company to pay a penalty. Moreover, the segment showed lumpy performance and can be better judged only when analyzed on a full year basis.

 Regulatory risk to come down, maintain Buy: We have reduced our EBITDA margin estimates to factor in the impact of Q3FY12 result and also changed our assumptions by 1) lowering EBITDA margin by 1% of the Africa business to 29% for FY13E; 2) increasing SG&A expenses over Q3 trend considering sponsorship payout and additional marketing on account of customer acquisition given the competitive environment. While regulatory uncertainty continues to hover, we believe that Bharti should be preferred considering its strong balance sheet and no/low risk on the company in case license for operators is cancelled following spectrum auction. At the CMP, the stock trades at 19.4x FY13E EPS, 6.7x EV/EBITDA. We maintain Buy on the stock with a revised price target of Rs438 (earlier: Rs457), an upside of 23.9% from the CMP. The decision on regulation is likely to come up within four months wherein clear license norms and spectrum pricing would emerge. Our take is that in NTP 2012, if licenses are cancelled, competitive intensity would ease and payout would come down for players.


>CEMENT SECTOR: Player wise dispatches (in million tones)

Cement giants ACC, Ambuja and Ultatech together reported 8.08% growth on YoY basis to 7.87million tones in their dispatches for the month of January after being stable for a month, the cement prices across the western regions again witnessed an upward pricing trend in the range of Rs.10/bag. This uptrend in prices is due to the improvement seen in demands. Demand improvement in Mumbai reflects the impact of increased construction activity ahead of the civic body poll scheduled in February 2012. Northern region witnessed a growth of 16.3% owing to increasing rural demand in Punjab, Haryana and Rajasthan. Southern region surprised with a robust growth of 16.7%.

ULTRA TECH CEMENT: UltraTech cement’s dispatches increased by 2.76% on MoM basis. 
During January 2012, UltraTech Cement’s (Aditya Birla Group Company) production stood at 3.780 million tonnes, growing by 11.54% on YoY basis and dispatches stood at 3.720 million tonnes, increasing by 11.34% onYoY basis. On monthly basis, both the production and dispatches increased by 5.88% and 2.76%, respectively.

For the period April-January 2012, UltraTech’s production and dispatches were 32.260 million tonnes and 32.220 million tonnes respectively against 31.380 million tonnes and 31.304 million tonnes during the same period of the corresponding year.April-January2011.

AMBUJA CEMENT: Ambuja Cement reported 0.73% fall in dispatches on MoM basis.
Ambuja Cement registered a growth of 3.47% on YoY basis in its production to 1.909 million tonnes for January, 2012. The company’s dispatches also grew by 4.13% to 1.917 million. Ambuja Cement’s production and dispatches both declined by 0.10% and 0.73% on MoM basis.

Cumulative dispatches of the company during the period April-January jumped by 4.53% to 17.540 million tonnes against 16.780 million tonnes during the corresponding period a year ago.

ACC: ACC reported a growth of 6.70% onMoM basis in cement dispatches in January, 2012.
ACC registered an increase in sales for the month of January, 2012 by 8.78% to 2.230 million tonnes. The company had sold 2.050 million tonnes cement in the same month last year. Production also rose to 2.250 million tonnes in January this year compared to 2.060 million tonnes in the corresponding month of last year. ACC Cement’s production and dispatches both increased by 10.84% and 6.70% respectively on MoM basis.

ACC's cumulative sales during the period April-January of the current year stood at 19.680 million tonnes over 17.660 million tonnes in the same period of last year. Production also increased to 19.680 millions tonnes against 17.740 million tonne.


>AIA ENGINEERING: Mining segment to drive future growth...

AIA Engineering (AIA) results were in line with our estimates. It reported 16% growth in revenue to Rs3.4bn (PINCe Rs3.3bn). OPM declined by 210bps to 20.3% YoY but improved by 250bps QoQ. Low tax rate resulted in 8.5% growth in net profits to Rs503mn (PINCe Rs463mn). Average realisations improved to Rs98/kg (vs Rs91 in Q2FY12) led by better product mix and price increases undertaken by the company in few contracts. We believe company’s endeavour to take price increase in the mining segment is really commendable. This could lead to improvement in margins going ahead.

Mining segment lead volume growth, margins improved sequentially
In Q3FY12, AIA reported 15% growth in sales volume YoY to 34,700 tons (37,500 tons in Q2FY12). Production grew by 12% YoY to 39,000 tons (37,000 tons in Q2FY12). Sales in the mining segment grew by ~50% to 17,500 tons (3% up QoQ). Realisations stood at Rs98 per kg (Rs97 per kg in Q3FY11) led by better product mix and price increase undertaken by the company in few contracts. Operating margins fell by 210bps to 20.3% but improved by 250bps QoQ led by better product mix and pass on of hike in material prices to the customers.

Company would continue to quote aggressively to acquire new mining clients but simultaneously go for price rise in existing customers. Historically company has demonstrated its ability to pass on the hike in prices to customers in cement industry. Management has indicated that gradually price rise would be taken in the mining segment as well where company has already demonstrated the quality of its products. Customer satisfaction, after sales service and product innovations would further lead to margin improvement. The size of the addressable opportunity in mining segment stands at 1.5mn tons p.a and management aims to capture 30% market share (vs 4% currently) in next 5-6 years. Capacity expansion of 100k tons (up by 50%) undertaken by management inspite of low capacity utilisation (70%) further strengthens our belief in the vast opportunity in the mining segment. Slowdown in the cement industry overseas is expected to persist in near future on account of global uncertainty.

Current order book of the company stands at Rs4.8bn. We believe capacity expansion of 100k tons and improved capacity utilisation of existing capacities would lead to volume CAGR of 22% (FY12E-FY14E). We introduce our FY14E estimates. After four consecutive years (FY09-12E) of flat growth in profits, we expect 24% CAGR in profits in FY12E-FY14E lead by higher volume growth and small improvement in margins. We increase our target multiple from 12x to 15x and upgrade our recommendation on the stock from ''SELL” to “ACCUMULATE” with a revised target price of Rs343 (15xFY13E).


>ADANI PORT & SEZ: Volumes disappoint; SEZ saves the day

 Results disappoint on lower volumes, SEZ saves the day: Mundra reported lower-than-expected revenues during the quarter on account of flat sequential volumes. Higher realization per tonne (+5% QoQ) on account of higher proportion of fertilizer volumes, led to port revenues increasing 4% QoQ in a amid flat volumes (-1%) in Q3 FY12. Aided by contribution from the SEZ side, where a new lease (~30 acres with Anupam MHI) was signed during the quarter, revenues increased 11% QoQ and 53% YoY to Rs6.91bn in Q3FY12.

EBITDA margins for the quarter were slightly higher-than-expected at ~69.7%, an improvement of 340bps QoQ and ~100bps YoY. However, interest cost was sharply (+70%) higher QoQ at Rs783m on account of a loss of ~Rs483m on derivative contracts (owing to the sharp depreciation in the rupee) during the quarter compared to a loss of ~Rs14 cr in Q2 FY12. Consequently, PAT stood at Rs3.1 bn, a growth of 36% YoY and 14% QoQ.

 Lower coal, crude volumes lead to flat volumes QoQ: The disappointment on the volumes front emanated from the coal and crude segments where volumes declined by 12% and 31%, respectively, on a sequential basis. Q3 witnessed a fall in volumes due to delay in commencement of HMEL refinery volumes which witnessed trial runs last quarter. Higher imported coal prices, coupled with a depreciating rupee, led to lower coal imports during the quarter. However, a strong pickup in fertilizer volumes (+47% QoQ) along with a continued growth in the container volumes (+7% QoQ) made up for the fall in the coal and crude segments, resulting in an overall flat throughput (-1% QoQ) at ~16.6mt for Q3FY12. Going forward, management expects coal volumes to start inching up again with a rebound in demand from Adani Power.

■ Valuations: We have moderated our volume assumptions, going forward, to factor in a slower pickup in coal volumes at Adani and Mundra UMPP. We continue to value MPSEZ on a DCF basis, whereby, our SOTP value now stands at Rs161/ share. Our estimate of a 21% CAGR in volumes over FY12-14, coupled with an expectation of strong free cash flow generation, going forward, leads us to retain our positive stance on the stock. We maintain ‘Accumulate’.


>ZYDUS WELLNESS LIMITED: Q3FY12 – Sales decline continues, lower expenses expands margins

• Zydus Wellness reported net sales at `510 mn, down 43.8% Y-o-Y resulting from decline in
Everyouth brand due to intense competition.
• EBIDTA declined by 29.9% Y-o-Y at `199 mn. EBITDA margins expanded 808bps Y-o-Y to 39%.
• Ad Spends were `2 mn as against `6 mn in Q3FY11 and `132 mn in Q2FY12.
• Other expenditure and Staff cost declined by 52.6% (down 319bps) Y-o-Y and 29.9% (up 90bps) Y-o-Y respectively in Q3FY12.
• PAT decreased by 4.7% Y-o-Y to `186 mn as against `196 mn in Q3FY11. PAT margins expanded by 15% points Y-o-Y to 36.5% in Q3FY12 as against 12.5% in Q3FY11 resulting from lower expenditure.

Result Highlights

■ Sales decline continues
Sales growth reported decline of 44% Y-o-Y on the back of de-growth in Everyouth (face-washes and scrubs) brand. Sugarfree and Nutralite have recorded single digit growth during the quarter. High competitive intensity in the category has resulted in de-growth in Everyouth brand. Management is confident about double digit growth as company resumes its brand campaign again in Q4FY12.

■ Margins expand as expenses declines
EBIDTA declined by 29.9% Y-o-Y at `199 mn. EBITDA margins expanded 808bps Y-o-Y to 39%. The company has withdrawn its brand campaign / communication during the quarter due to very high competition resulting very low return on ad spends. Ad Spends were `2 mn as against `6 mn in Q3FY11 and `132 mn in Q2FY12. Other expenditure and Staff cost declined by 52.6 % (down 319bps) Y-o-Y and 29.9% (up 90bps) Y-o-Y respectively in Q3FY12. This resulted in EBITDA margin expansion of 808bps to 39% in Q3FY12.

■ High other income boosted PAT growth
PAT decreased by 4.7% Y-o-Y to `186 mn as against `196 mn in Q3FY11. PAT margins expanded by 15% points Y-o-Y to 36.5% in Q3FY12 as against 12.5% in Q3FY11. Low tax rate (13.3% vs 33.2% in Q3FY11) has helped to push up the PAT margins to 36.5%.

■ Valuation & Viewpoint
Though Zydus wellness has strong brands like Everyouth, Sugarfree and Nutralite in niche segments on health and wellness platform. The recent decline in earnings is concern even though management is confident of double digit growth rate with reintroduction of brand campaign in Q4FY12.

■ Quarterly Result Snapshot


>BHARAT FORGE: Strong outlook to drive valuations higher

 PAT ahead of estimates on account of robust Top‐line: Bharat Forge (BFL) reported 21.1% YoY growth in its top-line at Rs9.4bn (PLe-Rs8.9bn) on account of an improvement of 29.2% YoY in export revenues at Rs4.6bn (Rs4.3bn in Q2FY12). Tonnage production for the quarter grew by 15.2% YoY to 55,412MT (53,740MT in Q2FY12). EBITDA grew by 26.2% YoY to Rs2.4bn (PLe- Rs2.1bn), whereas EBITDA margin improved 100bps YoY to 25.4% (Q2FY12–24.0%). EBITDA/kg grew by 9.6% YoY to Rs43.7/kg (Rs40.1/kg in Q2FY12), thereby, reflecting robustness of earnings. Due to lower interest expenses, PAT (adjusted for forex loss of Rs162m) grew by 46.8% to Rs1.18bn (PLe: Rs1.0bn).

 Non‐Auto revenues increased by 12.7%: Driven by higher contribution of the new non-auto facilities at Baramati, which grew by 55.5% YoY in revenues at Rs1.9bn (Rs1.8bn in Q2FY12), the overall non-auto business grew by 12.7% YoY to Rs 3.2bn (Rs3.3bn in Q2FY12). Non-auto contribution in standalone revenues now stands at ~34%.

 Overseas subsidiaries margins expand 170bps YoY: Top-line, on a consolidated basis, grew by 14.4% YoY, with EBITDA performance improving by 43.1%. Overseas subsidiaries reported a top-line growth of 5.6% YoY to Rs6.6bn (Q2FY12 –Rs6.5bn), with an EBITDA margin of 5.5% for the quarter (Q2FY12- 5.9%). Adj. PAT, on a consolidated basis grew by 41.6% YoY at Rs1.2bn

 Outlook and Valuation: Operating leverage, coupled with higher utilization at the new non-auto facility in FY13E, will lead to EBITDA margins of ~25.5% on a standalone basis by FY13E. We value the company on SOTP basis, with standalone business valued at Rs317/share and subsidiaries/JVs valued at Rs26/share. With improving ROE and strong cash flows, we reiterate our ‘Accumulate’ rating on the stock.